The Central Bank of Iran has sent an ultimatum to all banks to comply with interest rates on deposits approved by the Money and Credit Council, the top decision-making body of financial markets.
In a letter to bank CEOs, published by the CBI-affiliated news service IBENA, it said despite warnings some banks continue to offer interest higher than the announced caps.
"This is the last and final warning to unruly banks….they will face the banking law enforcement board if they fail to play by the rules," the regulator said rather unambiguously.
As per law, board members and chief executives of financial institutions are responsible for any illegal operations, the letter warned.
Banks were given two weeks to stop offering higher interest rates. It was reported last week that the dossier on one bank was finalized while five others had been in breach of CBI regulations. The banks arbitrarily increased interest rates on major deposits and saving accounts.
The regulator last month warned all lenders to play by the rules following persistent reports that some were offering more than 20% interest on deposits to attract big money. Using a variety of ploys banks have cajoled the CBI to raise rates to entice major depositors.
CBI officials said the regulator’s own investigations and reports received by it reveal that six banks and credit institutions have been in oblivious to the rate rules and as a result their board members will be summoned by the CBI’s law enforcement board. The names of the banks were not mentioned.
High rates on deposits have had a detrimental impact on the national economy and its finances. The central bank says such unwanted practices increase the cost of money, violate the rights of beneficiaries and put lenders themselves at risk, and possible insolvency.
However, it merits mention that low interest rates have undermined people’s enthusiasm to park money in banks as the national currency tanks and runaway inflation eats away at their hard-earned savings.
In mid-2020, the MCC, slightly increased one-year maturity deposits by 1 percentage point to 16%. Interest on two-year deposits was set at 18%. On short-term deposits with 3-month maturity, the rate increased by 2 percentage points to 12%. The main banking policymaker approved 14% for six-month deposits, up 3 percentage points.
In early August, Ali Salehabadi, the CBI boss, said the monetary regulator may consider the possibility of higher deposit rates.
Mohammad Reza Farzin, the CEO of Bank Melli Iran, later told the Persian-language newspaper Donya-e-Eqtesad that the MCC too was considering higher rates.
“However, according to available reports, many of its members were not in favor and ultimately voted against it.”
Valid Concerns
While the CBI has long insisted that high rates increase the cost of money for banks, there are valid concerns that low rates push savers to close their accounts and look for other safe havens to protect the value of the rapidly diminishing rial.
Data released by the CBI show term deposits have increased at a much slower pace than sight deposits, another sign that savers are less inclined to park their money in banks for longer periods.
Total sight deposits reached 10,935 trillion rials ($36.4 billion) by the end of the fourth calendar month to July 22. This was 61.4% higher on the same period last year. Sight deposits increased by 21.5% compared to the end of last fiscal year in March.
Term deposits lagged rising 32.5% to reach 40,681.4 trillion rials ($135.6b) by July 22. The rise was a fifth of sight deposits in the four months.
Sight deposits had been the main laggard for months due to the deep recession in asset markets. But now that is history. Increasing traction of sight deposits and declining appeal of term deposits indicates the obvious inability of banks to convince savers to keep their money with them. One primary reason is unattractive interest rates.
CBI data categorized term deposits into long-term, short-term and Qarzol-Hassanah (interest-free). Accordingly, short term deposits stood at 14,509.2 trillion rials ($48.3b) by July 22, up 30.8% y/y. Long-term deposits were near 21,118 trillion rials ($70.4b), up 28%.
